Introduction – The SECURE Act aims to: “Set Every Community Up for Retirement Enhancement”
Paid for with an anti-deferral provision which erodes the capital in IRAs by requiring inherited IRAs to be distributed – triggering taxable income – within ten years. "What Is the SECURE Act and How Could It Affect Your Retirement?" https://t.co/kJ3XpIHfAW via @investopedia
— John Richardson – lawyer for "U.S. persons" abroad (@ExpatriationLaw) December 27, 2019
The above tweet references an excellent article by Daniel Kurt, describing the pros and cons of IRA reform. Significantly, the article includes:
One other key change in the new bill is paying for all this: the removal of a provision known as the stretch IRA, which has allowed non-spouses inheriting retirement accounts to stretch out disbursements over their lifetimes. The new rules will require a full payout from the inherited IRA within 10 years of the death of the original account holder, raising an estimated $15.7 billion in additional tax revenue. (This will apply only to heirs of account holders who die starting in 2020.)
Legislative/Socioeconomic Background
There is a “retirement crisis” in North America. Neither Canadians nor Americans are saving enough for retirement. At the same both governments are operating with huge deficits. Individuals have failed to plan for financing their retirements. As a result, any and all honest attempts to improve the situation are welcome. That said, governments seem to reflexively attempt to solve problems by generally increasing taxes. In some cases, governments increase the rate of taxation on income. In other cases governments broaden the tax based by subjecting new things to taxation. There is however a worrisome trend toward governments simply imposing taxation on existing capital. Examples include: the Section 965 transition tax and Section 877A expatriation tax. In both cases these laws create “fake income” by deeming there to be a distribution where there was in actual fact, no distribution to be taxed. The SECURE Act continues the same principle by forcing certain inherited IRAs to be distributed within a ten year period. At a bare minimum, this reinforces the principle that individuals should not be able to easily transfer assets to the next generation and that existing capital pools are fair game for taxation.
Prior To The SECURE Act Certain Inherited IRAs Could Grow For The Life Of The Beneficiary
In an earlier post (with the help of Chris Stooksbury) I had described the tremendous growth and capital preserving opportunity in certain inherited ROTH IRAs.
No more!